Market’s Bill of Health – Slight Weakness in Cyclicals

The markets continued to strengthen over last week as the long term, intermediate term, and short term outlooks continued to improve. While the improvement in the market is bullish, we are starting to hit extremes and some digestion in the market should occur where markets look for an excuse to correct. Today’s Fed meeting may be just the catalyst. Additionally, there is some weakness occurring in cyclical sectors that may portend a short-term pullback in the markets. That said, given how healthy the market’s vitals are, any pullback or consolidation should not only be short-lived but mild in nature as there is no evidence of a significant market top forming.

S&P 500 Trend Strength* Note: Numbers reflect the percentage of members with rising moving averages, 200d MA is used for long term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short term outlook.

S&P 500 Member Trend Strength

Breaking out the 500 stocks within the S&P 500 into their respective sectors and viewing their long (200d SMA) and intermediate trends (50d SMA) shows an underlining message of accelerating global growth with financials and industrials taking the top spots.

Source: Bloomberg

However, looking at the short term picture (% above 20d SMA) shows a bit of a “risk off” trade occurring which may indicate a short-term top is forming. For example, Looking at the difference between today and last week’s numbers for the percent of members in each sector above their short-term moving average (20d SMA) shows deterioration in cyclicals (technology, industrials, materials) and strength in the defensive telecommunication sector.

Source: Bloomberg

Market Momentum

The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 500’s momentum, on a daily, weekly, and monthly basis. Compared to last week, the percent of stocks within the S&P 500 with daily MACD BUY signals worsened from 74% to 62%. This decline in the market’s short-term momentum coupled with the message from the short-term trend deterioration in cyclicals and strength in the defensive telecom sector highlighted above does suggest we may get a short-term dip in the markets. That said, the markets intermediate and long-term momentum improved which means the market should head higher after any short-term pullback.

The intermediate momentum of the market improved from 77% last week to 84% this week. Also seeing an improvement was the market’s long term momentum as the percent of S&P 500 members with monthly MACD BUY signals increased from 68% to 69%. The evidence below highlights that the market's momentum across multiple time frames remains bullish with the path of least resistance remaining to the upside.

Source: Bloomberg

52-Week Highs and Lows Data

We have a well-represented market rally as more than one third of the entire S&P 500 hit a 1-year high in the last five days. As seen below, we have a very robust market rally on our hands and there is very little red below, with the weakest area of the market found in the utility sector which tends to underperform when interest rates rise as utility dividend yields become less competitive with income investors relative to the bond market.

Source: Bloomberg

Not only do we have a broad-based market rally when viewing all ten sectors, but we have broad-based participation based on market cap as seen below.

Source: Bloomberg

We were seeing a bit of a negative divergence between the market hitting new highs with fewer and fewer stocks participating in the rally. However, we are not seeing bearish divergences as noticeable as occurred prior to the two big 2012 corrections. This tends to indicate we may pause ahead but reach new highs later in February before a more serious top forms.

Source: Bloomberg

Summary

The market continues to march higher in 2013 as short- to long-term trends and momentum for the S&P 500 remain bullish. The slight deterioration in the daily readings for MACD BUY signals as well deterioration in short-term trend strength in cyclicals suggests the market may cool off a bit ahead to help alleviate the market’s overbought condition.